Many investors feel Microsoft is fading, despite strong earnings. Apple, which recently passed Microsoft in profit for the first time since 1990 also recently passed Microsoft in terms of market cap. IBM -- another old rival -- is expected to soon do the same. (Source: AP)

Investors fear that tablet and mobile devices will eventually minimalize PC sales, leading to Microsoft to go from a market leader to a bit player. (Source: Level Ten Design)

You just can't please some people

Microsoft Corp.'s (MSFT)
market cap -- a measure of the total current value of shares -- rests at
$219.9B USD. While that may sound great, competitor Apple, Inc.'s (AAPL)
cap is nearly 46 percenthigherat $320.5B USD.

In all practicality, both companies arefiring
on all cylinders. But Microsoft is earning far less respect for its
work.

Fueled by record sales of its Windows 7 operating
system and Office software suite, Reuters
I/B/E/SexpectsMicrosoft
to post a profit of $4.7B USD. That's approximately 27 percent less than
Apple'srecord
earnings of $5.99B USD. But as you can see, the gap in share value is
much larger, percentage wise, than the gap in profit.

There's much debate currently over the investment
community's low valuation of Microsoft. Basically, it largely boils down
to that investors perceive companies like Google and Apple to be growing, while
they feelMicrosoft
is fadingin the market.

Sales don't currently agree.

Microsoft is expected to earn a record $16.2B USD
in its third fiscal quarter (the first calendar quarter of 2011). And
sales for its Entertainment and Devices Division (Windows Phone 7, Xbox 360,
etc.) are also rapidly growing.

But at the end of the day investors appear
convinced that Microsoft is in for a rough landing. They eye the fact
that the company has been passed by Apple in profit for the first time since
1990. And they also are well aware that International Business Machines (IBM)
-- another foe Microsoft passed in the 1990s -- may soon pass it in value as
well. It currently sits at a market cap of $206.3B USD.

Following the post recession recovery the entire
tech market is booming, but the investors' strongest evidence in their case
against Microsoft may be PC sales. Over the first three months of 2011,
PC sales fell 1 percent. It is believed that is largely due to the sharp
rise in tablet and smart phone sales. People are still buying PCs -- but
they're doing so less frequently as they increasingly rely on mobile devices.
And that's troubling news for Microsoft, who has struggled thus far in
the mobile sector.

Michael Yoshikami, Chief Executive of fund manager
YCMNET Advisors is among those very concerned with this development. In
an interview withReuters, he states:

What people are going to be focused on is what's happening with
their core PC business. Is that slowing down? That's really going to
dictate what Microsoft's future earnings power is going to look like. In
the long term, their core cash flow business is going to be impacted,
particularly if we start to see an ASP (application service provider) model
where companies are essentially renting software.

His comments allude to a second major crisis
facing Microsoft -- advertising supported and rented software. Both forms
of software tend to produce lower revenues. And most of Microsoft's
profit is still driven by software sales -- particularly the sales of business
licenses. As business software giants like SalesForce.com Inc. (CRM)
and Google Inc. (GOOG)offer
rented software, Microsoft finds its earnings under assault on a second
front.

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If cars were going to replace PCs, then yes we would say Microsoft is being killed by Toyota.

In order for Android and iOS to clean Microsoft's clock, then Microsoft would need to be displaced by iOS and Android. That remains to be seen.

Microsoft has three real cash cows and those are being cut off by Google and Apple. Is Microsoft safe from Android and iOS?

1. Microsoft's dominance in PCs means any tablet or smartphone bought that delays or retards a PC purchase is a lost opportunity to sell an OS license. Android and iOS are winning, and Microsoft has yet to reestablish any kind of foothold. RIM still has a significant market share compared to Microsoft.

2. Microsoft has only sold 350 million W7 licenses in the last 18 months. RIM sold 45m smartphones in 2010. Apple sold 46.6m, and in total 296m smartphones were sold. Of that lot? Microsoft was only 12m. If you include the 172m units shipped in 2009, more smartphones were sold than W7 licenses.

3. Corporate? Blackberry and iOS are making corporate inroads with iPads, Blackberries, and iPhones. You seem to think PCs are unassailable. Tell that to IBM who banked on mainframes 30 years ago. Most businesses need less, not more, flexibility. A locked down iPad with bluetooth keyboard and strictly controlled access to network resources and apps will function just as well as a locked down PC with keyboard. Heck, if you could get apps on an AppleTV, a locked down AppleTV with DVI output for $99 would work too.

I don't really understand how you can perceived your post as positive spin. You're pointing out that w7 alone has more license sales than all smartphone sales combined, and that microsoft managed to push through 25%~ of what their competitors did (though I believe the numbers you're posting are from all devices RIM and iOS and not just limited to smartphones) in the smartphone category(45 vs 12). You also don't give any evidence of lost windows sales due to smartphone adoption. On the contrary, it would seem like the current smartphone/tablet industry has done nothing to windows as windows 7 maintains substantial sales and has managed to surpass windows XP.

The argument that corporate is interested in replacing desktops (currently) with blackberry/ios components is absurd. I've had my corporate blackberry for years and I've yet to be summoned to a meeting discussing desktop shift to blackberry, mainly because it does absolutely nothing but communicate. This is the same with ipads, especially since it's a closed device and we would need to jailbreak them to be able to run anything of use other than browsing the internet and taking facebook photos.

Actually, if you read my post, W7 alone has less license sales than all smartphone sales combined, and that MS alone has pushed less than 5% of smartphones in a year.

There's no evidence of lost Windows sales due to smartphone adoption, I even said that, but I do believe in a year or two that is a very real threat. The proof is in the announcement that Microsoft will support ARM in Windows 8.

Don't forget that W7 netted 350m in 18 months, while my numbers were for 1 and 2 years respectively. 1 year is lower than 350m, 2 years is much higher, and for the 18 month period it would be reasonable to say that sales were comparable.

You're being shortsighted if you don't think Windows 8 on ARM wouldn't be an extremely cost effective business oriented thin client. The risk is that someone else (RIM, Google, Apple, or HP) gets there first. My bet is HP.

I think businesses like the idea of cutting out the heavier hardware cost for PC terminals (moving to an AppleTV-type box for stationary, iPad-like for mobile employees), cutting out the Microsoft licensing costs, and having a more efficient platform to build on. Remember, Android is just Linux. Development and security isn't going to be a stretch. Managing and maintaining these devices will also be a lot cheaper and easier.

Where are you getting the idea that it's going to be cheaper? Laptops are cheaper then tablets. Most of the desktops businesses buy also tend to be low end rather then high end workstations. Also if they use windows they likely have a site license, and receive support from microsoft. Who's going to support the tablet OS? Google?! The tablet manufacturer? How about onsite service? How about qualifying hardware and software to run on your tablet or porting your legacy software to the tablet? Not to mention that you can forget about upgrades or part swaps. Your tablet breaks you pretty much have to send the thing back to the manufacturer for repair.You're describing a total nightmare for an IT department.

Windows 7 is new, so people that bought them now won't buy them next year. Compare that to the people that buy a new mobile phone. I don't know what the future holds for Microsoft in mobile devices, but based on the current position, Microsoft isn't seen as able to take a major part of that market. Considering that Microsoft had WindowsCE and Windows Mobile phones in the market before Apple and Google took it by storm, and that Microsoft was almost the only player in tablets (well, Microsoft's tablets were mostly convertible laptops with touch screens), analysts are seeing its current position as "Microsoft lost".